Author: CRT Admin

It is said that the Greeks defeated the Persians in the naval battle of Salamis on September 29, 480 BCE.

It’s not often one can justifiably note an event of 2,500 years ago, but the Battle of Salamis may be such an occasion.

Here are some reflections for your consideration on the consequences for our modern civilization of that defeat of the Persians so long ago.

I would be most interested in your thoughts and feedback.

I send for your consideration a short essay by Karel Noordzy titled “The Impact of Corona: Curse or Blessing?” on the challenges we now face in a time of inflection between one era, the Post World War II order, and another, as yet not fully arrived and so not fully perceived and understood at all. What will that new era bring to us or rather, what will we bring to that new era: hope and wellbeing or anger, exploitation by the strong of those who can be turned to their advantage, resentment and repression of the best in human nature?

Karel worked as a Senior Consultant at McKinsey & Company. He then ran Schiphol Airport in The Netherlands and came up with the strategy of reaching out to regional American airports to fly to Schiphol as their point of entry into Europe, which turned Schiphol into one of the most used – and most highly rated – airports in Europe. Karel then ran the Dutch railroad system. He has been a leader of the Caux Round Table for over 20 years. Karel has written a book on leadership, which we will soon be published in English.

Karel has given us a serious and I think correct analysis of our time. By listing our difficulties so forthrightly, he jumpstarts the process of our figuring out what we should do and how we should do it.

Fifty years ago on September 13, 1970 in the New York Times Magazine, Milton Friedman insisted that “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

In holding forth this simple and strict rule as the proper mission for private enterprise, Friedman championed one widely approved understanding of what enterprises need to do, importantly leaving them quite free of government direction of their affairs.  As most corporate statues hold, the business and affairs of every corporation shall be managed by or under the direction of a board of directors – not any public authority.  Seeking profit is the appropriate social contribution of the private sector, leading to wealth creation and raising living standards.

But there is a rival understanding of the mission of enterprise and that is to incorporate in the management of the firm express concern for the interests of its stakeholders.  In Friedman’s day, this was referred to as “corporate social responsibility” or “CSR.”  Friedman was no fan of such an approach: “The discussions of the “social responsibilities of business” are notable for their analytical looseness and lack of rigor.  What does it mean to say that “business” has responsibilities?  Only people have responsibilities.  A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense.”

Today, the “CSR” mission is alternatively phrased as “sustainability” or “ESG” for environment, society and governance or “long-term value creation.”  At the Caux Round Table (CRT), we call this understanding of enterprise as “moral capitalism.”

Since the publication of our Principles for Business 26 years ago, we have proposed that the dichotomy between Friedman’s profit-centered view of a business and the more complex, supple and generative vision of the CRT is a false one.  In point of fact, the two missions are interdependent.

A firm lowers its risks by attending well to its stakeholders.  That is good management and wise strategy.  And in reverse, a firm which ignores profit is in no position to optimize its contributions to its customers, employees, owners and society.

The leadership challenge is to find profit through taking care of its stakeholders, a pretty simple and wise formula for success.

And yet, the Milton Friedman dictum has many who still defend it.  What reasons might support such fidelity to the ideal of seeking profits above all else?

One reason is the appeal, whenever action is undertaken, of having a single-minded focus.  It is commonplace in business education and best management practices that a firm should focus on its core competence and not stray from that path to success.  Similarly, a focus on profit provides an easily discernable goal to which everyone in the company can give their undivided devotion. Regular reporting on profits provides reliable guideposts along the road to success, letting everyone know if their efforts are contributing to achievement of the goal.

Secondly, the mind has a bias towards simplicity of image and metaphor, heuristics facilitating fast and efficient thinking.  The U.S. Army is known for its reliance on the moto KISS – “keep it simple stupid.”  Lyndon Johnson said that “Gerald Ford can’t chew gum and walk at the same time.”  James Carville explained why Bill Clinton won the 1992 presidential election simply: “It’s the economy, stupid.”

The seeking of essence directs attention to the core of the matter, the hub to which all spokes are attached.  Seeking profits concentrates the mind and eliminates lots of talk and arguments over what to do, when and how.

Thirdly, making profit so important supports accounting conventions and more sophisticated financial analysis, especially as pioneered by the Harvard Business School and used by analysts at accounting and investments banking firms.  Financial engineering is mathematical and thus requires precise numbers to reach its conclusions.  Financial theory taught that the value of a share of stock was driven by reported earnings.  To value a company, then, demanded knowledge of its profits.

Fourth, in the 1970s, a theory was proposed and widely followed in business and finance that those who act for others – agents, employees, directors, etc. – are too self-interested to serve as instructed or as obligated by their fiduciary duties.  This is the “agency theory,” which concluded that such instinctive dereliction of duty could be offset by monetary rewards and compensation.  Thus, success in doing your job was to be measured in money earned.  Profits earned by the firm, therefore, was a natural way to compute executive compensation.  When the award of stock options to senior executives in lieu of cash salaries was encouraged by changes to the American tax law in the early 1990s, compensation of CEOs and other senior corporate employees was tied to share prices which reflected, through market trading, profits and losses.  Those who were to be paid according to profits earned concentrated their efforts on making profits and avoided distractions and diversions from that task.  They put all their eggs in one basket and watched that basket closely.

Fifth, many see a chasm separating public from private goods, the one to be provided by government and paid for with taxes and the other provided by private firms and paid for by customers.  To keep private firms separate from government and autonomous within private markets only, it was thought proper to limit them to the production of private goods and services only.  The standard for private goods and services was consumption by private persons under claim of personal ownership.  Thus, if a firm were limited to counting profits and not striving to provide a range of other outcomes and impacts, it could be kept within the bounds of private demand for its goods or services.  It would not trespass into the realm of government providing public goods for the general public.

The distinction between public and private goods was made by Friedman himself in 1970:

“What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman?  If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers.  For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation.  Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment.  Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.  In each of these cases, the corporate executive would be spending someone else’s money for a general social interest.

Many a reader who has followed the argument this far may be tempted to remonstrate that it is all well and good to speak of governments having the responsibility to impose taxes and determine expenditures for such “social” purposes as controlling pollution or training the hard-core unemployed, but that the problems are too urgent to wait on the slow course of political processes, that the exercise of social responsibility by businessmen is a quicker and surer way to solve pressing current problems.”

Moral capitalism, just as it unites profits with stakeholder management, recognizes that a range of externalities – quasi-public goods – flow from what private firms produce – pollution being only one of them.  Thus, moral capitalism provides guidelines to firms so that they can appropriately manage their businesses by incorporating as good risk management awareness of quasi-private and quasi-public goods and services.  Moral capitalism thus mediates between firms and the societies in which they seek to prosper so that both may prosper together.

World War II officially ended on September 2, 1945, 75 years ago today, when Japan’s imperial government surrendered to the Allied powers. After that, an international order was put in place, largely with leadership from the U.S. and defended against Soviet ambitions and subversion of liberal and traditional orders by Communist ideologues.

Recently, we have heard worries expressed that, in our time, that international order formed under the umbrella of the Charter of the United Nations, which was drafted and ratified to realize the ideals of the Atlantic Charter of 1941, may be falling apart, as the demands of populist nationalisms seek preeminence. Those ideals are reflected in the Caux Round Table’s principles for business, government and civil society and shape our “internationalism” and its confidence in the advantages of our collective securing of the common good.

An essay reflecting this history and idealism can be found here.